Nobel Laureate Paul Krugman, Brazil’s Rare Earths Bet

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1:46This is Wall Street Week. I'm David Weston bringing you stories of capitalism. China and the United States are playing a high-stakes poker game over rare earths. We go to South America to see whether Brazil may provide the U.S. with a winning hand. Plus, we're used to tracking prices in capital markets moment by moment. Why not the same for our groceries? A supermarket chain in Norway points the way to dynamic pricing for all sorts of goods and services. But we begin with a conversation with Nobel Prize-winning economist Paul Krugman, former New York Times columnist and a professor at the City University of New York.

2:23We spoke to him about the American economy and the costs and benefits of the Trump administration's policies. Starting the day I take the oath of office, I will rapidly drive prices down and we will make America affordable again. In the campaign, the big promise by Donald Trump was that he was going to bring down prices and make America affordable again. and everything he's done is the opposite of that. So, you know, if you were asking, you know, imported goods are going up in price. We're going to see a lot more than that of that. But, you know, vegetables are going up in price and a little bit of that is tariffs.

3:02But a lot of that is farm workers are making themselves scarce because they're afraid that ice will pick them up. If we're worried about housing costs, a lot of the construction industry's immigrant workers, and particularly the actual physical jobs. The guys actually up there on the roof tend to be immigrants, many of them undocumented. And even the ones who are legal are afraid. Ultimately, I think what really matters is the standard of living for Americans across the board. What are we doing to the standard of living? Are we improving it or are we actually turning it down? Oh, no, this is clearly all negative for the standard of living.

3:41You're making, you know, when you put a tariff on, one way of putting it, the sort of standard economist econ 101 thing is, you're taking things that we do relatively badly and other countries do relatively well, and we're making, and we're insisting that those things be done here, which raises costs, reduces our standard of living. If we look at the immigration policies, the really important thing about immigration in America is that the immigrants do not do the same jobs that native-born Americans do. They're very concentrated in a limited number of industries and occupations, which are very much complementary to the jobs that native-born Americans do.

4:26And by driving out the immigrants, we are reducing the productivity, reducing ultimately the living standard of the native-born workers. Trump tariffs are a part of the story that Krugman knows well. His Nobel Prize was awarded in 2008 for work on trade patterns. But he says the tariffs themselves might not be the biggest problem. Consistent tariffs are bad, but not as bad as legend has it. You know, everybody's told, said Smoot-Holy caused the Great Depression. That's not remotely true. And if you run even Trump's tariffs as they stand at the moment through a sort of standard model, they will reduce GDP by something like half a percentage point in the long run.

5:13It's serious. It's bad. It does terrible things to U.S. credibility because we're breaking all of our agreements. But it's not a huge thing. What we've never had before is tariffs where nobody knows what the tariff rates will be next month, let alone a year, two years from now. It's this complete, utter chaos. It's sort of the whims of the president and then the question of whether the courts even allow him to do what he's doing, which wreaks havoc with business. Any investment a business makes right now has a good chance of turning out to be a really bad investment because the tariff rate isn't what you thought it would be.

5:52What about margins for corporations? Because typically you might see it show up there. It's suggested that part of the reason we're not seeing tariffs is some of it's being absorbed by exporters, some by importers, and some by consumers. The exporters are not absorbed very much. We have independent data on prices actually charged by foreign countries for their exports to the United States, and those have not gone down. So it does not look as if foreigners are absorbing a significant amount. It does look like U.S. businesses have so far absorbed a significant amount. Partly that's because they rushed inventory in, they rushed imports in to front run the tariffs.

6:28Partly because they're not sure if the tariffs are here to stay. They don't want to raise prices and alienate consumers until they have no choice. But no, it looks quite significant. And it's really important also to understand that this is not William McKinley's world economy. This is not what Trump thinks it is. This is not a world in which you export manufactured goods and you export farm goods and that's it. This is a world of supply chains, complicated structures. And very many of the tariffs are actually being levied on inputs into U.S. manufacturing. So this is doing a lot to actually raise costs of U.S.

7:05businesses as well. So there isn't a lot of slack in the end. I'm enough of a, you know, I may be kind of center left, but I don't believe that businesses are making massive profits that can just be legislated away. So in the end, businesses won't be able to absorb them, and it's consumers. What about the stated goals of President Trump, whether he's achieving them or not? One of them is actually protect or bring back manufacturing jobs onshore of the United States. Is that a sensible goal? And by the way, how is it affecting the auto industry? because the auto industry supposedly is one of the beneficiaries of all this.

7:39Yeah, the auto industry actually is sort of case in point for, you know, this is not actually working. And for the auto industry, a lot of it has to do with the fact that there isn't a U.S. auto industry. There's a North American auto industry. It's very integrated with Canada and Mexico. Parts of an individual car may cross a border seven or eight times before you end up with a finished vehicle. And all of this stuff is adding costs. So the auto industry is particularly ill-suited. You know, steel and aluminum. What do you make cars out of? And we have tariffs on steel and aluminum. Could there be an ironic unintended effect, which is actually as you put more and more pressure on the costs for manufacturers, they automate more.

8:18So it doesn't turn into jobs. It might turn into GDP. It doesn't turn into jobs. Well, just in general, even aside from the cost pressures specifically, if you ask yourself which industries might be induced to come back to the United States, It'll be industries where the labor cost disadvantage is not too large. We're not going to be bringing back apparel. There's just no way, unless you have just hundreds of percent tariffs, that we're going to bring clothing manufacturer back from Bangladesh to the Carolinas. What you can bring back conceivably are industries where they're very capital intensive.

8:58Robots do a lot of the work. So we may be creating more jobs for robots, but not a whole lot of jobs for U.S. workers. There is the effect, apparently, we hear from Secretary Besant on the deficit. That, in fact, we are putting a lot more money into the Treasury because of these tariffs. Is it helping us on the debt and deficit? Well, in the direct effect, look, tariffs are basically a tax. They're a sales tax that are levied on selected goods. It's a sales tax on goods that we import. And sure, if I put on a national sales tax, it would raise revenue and reduce the deficit. And, you know, a lot of economists have said the United States really should have a value-added tax, which is basically a sales tax.

9:41And, you know, most other advanced countries do that, and we kind of could use the money. So through a backdoor route, Trump is making America a little bit more like Denmark with a sales tax paying for part of the... But it's really not going to be enough money. Secretary Besson said it's like$300 billion. It's extremely unlikely that we'll get that much, although it's possible. If we're increasing tariff rates by around 15 points, that could get you to several hundred billion dollars. But the idea that if you impose a tax, it raises money, that's not an exotic, that's not a policy triumph. That's just how budgets work.

10:18Are you concerned about the long-term permanent effects of what's happening right now, rather than just the ups and downs, the vicissitudes of an electoral system? What people don't, I think, fully realize is that on tariffs, almost everything Trump has done is probably illegal under U.S. law, but definitely a violation of international agreements. I mean, we have, we built the world trading system. And we built, I say we because that's the United States. The U.S. created this thing, which is a system of rules and laws. We've just ripped up a whole system of trading agreements, a system that we built over 90 years, because this really goes back to FDR.

10:57You don't put that back together. Even if the next president says, OK, everything, my first act is to undo everything Trump did, the United States will never be trusted again. We used to be a country where if we made an agreement, that was an agreement. I mean, I was in the Reagan administration working on trade things. And there would be meetings in which some proposal would be floated. And the guy from the U.S. Trade Representative's office would say that would be GATT illegal. General agreement on tariffs and trade, which binds this. And end of discussion. In the Reagan administration, if it was a violation of our international agreements, we didn't do it.

11:38This administration doesn't care. They don't even try to justify violating these agreements. Even as the Trump administration charts a very different economic path for the U.S. overall, Krugman's home city of New York is facing its own potential shift. As the self-proclaimed democratic socialist Zoran Mamdani is ahead in the polls for the mayoral race, Krugman is more sanguine about what that could mean. What we call a socialist in America, it would be just kind of a social democrat in Europe. It's really not extreme. Some of his proposals might be a little, I'm not sure about the rent stuff. I actually don't think that opening some city-run groceries is a problem.

12:24And in practice, he would almost surely govern pretty much just a slightly more populist version of what we have. I don't think we need to worry about radical change. But the rent stuff, as you called it, if the problem is affordability of housing in New York, really freezing rents is not traditionally the way to get more housing stock built. Yeah, but what he's talking about is not freezing all rents. He's talking about stabilizing stuff that's already rent controlled. And so it's really, it's a policy at the margin. It's probably not likely to have much effect on housing construction. And it does sound, from other things he said, that he really would try to get a lot of housing built.

13:09And that's the important thing. I'm not really worried about that. And it's the panic over what really wouldn't be very different from the way New York City has been governed. It is all wrong. And it would take a lot to really ruin this city. The resilience of New York City has just been amazing over the years. Coming up, what if our supermarket could change its prices several times a day, depending on market conditions? We look at the economics of dynamic pricing and why it might be a good deal for both buyers and sellers.

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15:10This is a story about making a market, bringing willing buyers and willing sellers together to agree on a price. When it comes to things like securities, commodities, and currencies, prices are set moment by moment. But what about goods and services? Why shouldn't the price of a dozen eggs float just the way the price of a stock or a bond does? It's an electrical shelf label that shows the price. It shows the product information that the customer needs. Basically, just a paper label, digitalized, and we are able to change the price within minutes if we want to. And for that matter, why leave it at the price of goods?

15:51What about a variable price for labor? Where we're at is that robots are deciding what prices are, robots are deciding how much workers get paid. Call it what you will, dynamic pricing, surge pricing, or surveillance pricing. It all comes down to the same thing. Every firm has an incentive to charge a different price to different customers at different points in time. The reason is because if a consumer wants to pay, it's changing. As a firm, what I want to do is to charge a high price when you're willing to pay a high price, and charge a low price when you're willing to pay a low price. John Zhang is a professor at the Wharton School of Business.

16:33As a firm, I really have an incentive to make sure that when you're willing to pay a high price, I'm going to charge a high price. Dynamic pricing may sound revolutionary to some, but it's actually as old as the markets themselves. What's changed is the technology and, in some cases, the laws. If you go back probably hundreds of years to the village of free markets, the vendors there obviously just use dynamic pricing. They're going to change the price depending on who are the customers who show up and also depending on when you're showing up. Modern-day dynamic pricing began in the 70s after the airlines were deregulated.

17:14Nowadays, it can mean charging different prices based on overall demand at different times, or even charging different individual buyers according to their willingness to pay. Variable pricing basically means that as a firm, I'm going to charge different prices for different products in different usage locations, and also depending on who the customers they are dealing with. Dynamic pricing, if you look at it, really has multiple dimensions. And you don't just change the price over time. You also charge different prices across different products you have to sell. And also for the same product, you may actually charge different prices across different customers.

17:55For the same customer, you also charge different prices over time. In Norway, supermarket chain Rema 1000 has been using dynamic pricing since 2012 across its 680 retail stores. Parthap Sandhu is Remo 1000's head of pricing. So the market in Norway is quite competitive. We want to be cheapest on Christmas sodas, so we lower the price 10 cents lower than our competitors. And they might be having the same strategy as we have, so they'll go even 10 cents lower. And then we get these kind of race-to-the-bottom situations where we try to beat each other and the price gets really, really low. Basically, you get lower price when the demand is high.

18:42So we don't set the price up when the demand is high. We'd rather set the price low when the demand is high. Charging what the market will bear makes good sense from the perspective of a seller like Remo 1000. It can help make sure that it's not being undercut by competitors and that no money gets left on the table. But the buyers whose money is being taken have not always been as enthusiastic. Wendy's flirt with this idea of doing the surge pricing for burgers, and they're trying to learn from the Uber. Uber, of course, in this particular situation, the surge pricing really helps the consumers.

19:21So there wasn't a whole lot of backlash. When you surge pricing, on the one hand, you're going to manage the demand. Similarly, because more people probably would decide that they're not going to take Uber, they're going to take a subway, take a bus, and so on and so forth. Most importantly, surge pricing will help you to draw more cars into Manhattan so that the supply for the cars will increase. Every customer who wants to take an Uber and actually have access to Uber. In Wendy's case, that's not the situation. When you surge a price at lunchtime when people are hungry, you don't necessarily increase your supply in any way.

19:57And consumers don't see any benefit in that surge pricing. So that's why there was huge backlash from the marketplace. It's not just the Wendy's experience that's drawn attention. In the U.S., Senators Elizabeth Warren and Robert Casey took issue with Kroger's use of electronic shelf labels and dynamic pricing, saying, widespread adoption of digital price tags appears poised to enable large grocery stores to squeeze consumers to increase profits. But despite some complaints, Professor Zhang says that dynamic pricing is not always bad for the consumer.

20:55My son is very good at doing this nowadays because he does travel quite a bit between Philadelphia and New York. So in that sense, indeed, that uncertainty in this kind of a situation, if you know what you're doing, if you want to make an effort, it could be beneficial to you as a consumer. Dynamic pricing can benefit the seller of airline tickets or supermarket items. But what if the thing being sold is your labor? How might dynamic pricing work if applied to how much we make for a living? The question is not hypothetical. Any contractor or freelancer will tell you how their take-home pay can change depending on the day.

21:34But for some workers, it comes down to the minute or even the second. So a couple of years ago, Lyft and Uber moved into what's called algorithmic pricing. So in other words, there is no percentage that we actually get of the fare. And there is no rate card that tells you how much you're going to make per mile, how much you're going to make per minute. On the driver's side, you think, oh, well, that'll be good for drivers. You know, oh, maybe they're charging me a lot, but my driver will get that. No, because guess what they're looking for us is our lowest fare point. So let's say you tend to take whatever ride comes across.

22:17They will pay you lower and lower and lower. It's death for us. So if you see a 20-mile ride come in and they're going to pay you$10 for that, that's 50 cents a mile, period. You're losing money on that. I think for me, as Americans, we want innovations. We want to be able to rely on tech. We love our phones. All of that is really good, but we really have to look at some of the downstream that isn't good about this tech in order to bring it home to protect consumers, to protect our environment, to protect workers' rights. I think that for employees, salaries have always been dynamic. And especially in an inflationary environment, they know that the salary are on the rise, even though the real wages may or may not actually increase.

23:10Zhang says that dynamic pricing is also a double-edged sword. Even though it can give companies more ways to compete, it can also push them to compete away their margins if they're not careful. Dynamic pricing is always good for a firm in the short term. If you know what you're doing and if you can identify when a customer is willing to pay high price or low price and you have a good way to implement it, it's always good for you simply because you're going to generate more incremental revenues. You're going to in fact increase your profitability for sure. But one downside with dynamic pricing is this.

23:47You look at the airline industry for instance. It's probably one of the earliest and the most sophisticated industry where dynamic pricing was introduced. But if you look at the cumulative profitability for airline industry and since deregulation in 1978, you know that in fact that the cumulative profitability is either zero or slightly negative. Okay. So there we see that the industry that's a very sophisticated dynamic pricing, yet that the whole industry seemed to be suffering because of it. And there is good reason for that. And the reason is because unilaterally as a firm, you want to implement dynamic pricing no matter what other firms are doing.

24:32One key consideration for firms looking to introduce dynamic pricing, it matters when you do it, such as, for example, when people may be expecting some higher prices because of tariffs. If you look at the tariff situation, the pricing environment is really becoming more uncertain. And most importantly, we are putting into an inflationary environment. You can imagine that in an inflationary environment, consumers tend to be more forgiving for any price increase. And they certainly will be more forgiving for price variations. And so because of that, you can imagine as a firm, if I always want to embrace dynamic price, this would be a good chance.

25:17And somebody, because if I vary the price, the consumer's property will not mind as much. And most importantly, if I raise the price, I have an alibi to tell consumers. And even more important than picking the right time to move to dynamic pricing, maybe positioning it the right way for your customers. You want to do dynamic discounting, I think that's a good way to do it. In fact, you look at the way that firms implement dynamic pricing, the mistake they're making is basically that, oh, our price is going to go up and down, right? So that's one way to do it. And the other way to do it is basically say, well, we have all this price, that's a regular price.

25:57We just offer dynamic discounts, right, over time. And everybody gets a trophy. And so in that situation, everybody feels better. Call it surge pricing, and it doesn't sound like there's much in it for the consumers. But dynamic discounts? That sounds more like we are all getting a trophy. Up next, rare earths are critical to our tech future. And China has had a corner on the market. We look for alternatives in Brazil.

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